An Insurer’s Duty to Investigate LTD or STD Claims
It is well established in Canadian law that an insurance contract, and the corresponding relationship between insurer and insurer, is one of “utmost good faith.” This duty operates reciprocally, as the insurer must complete their obligations in good faith in exchange for the insured’s promise to present their claims in good faith.
This blog post focuses on the former duty, particularly, the insurer’s Duty to Investigate Claims in Good Faith.
The Duty of Good Faith in Canadian Law
Bhasin v. Hrynew, 2014 SCC 71 is the leading Canadian contract law case that defines good faith as a basic organizing principle for contractual relations. The good faith principle requires parties to perform their contractual obligations honestly and reasonably, rather than in capricious or arbitrary manners. Therefore, an insurer must “deal with its insured’s claim fairly, both with respect to the manner in which it investigates and assesses the claim and to the decision whether or not to pay it.”
This cemented the Whiten v. Pilot Insurance Company, S.C.J. No. 19 principle that an insurer must treat its insured during the claims process with the “utmost good faith.” Whiten goes on to state three particular areas where the insurer must act both promptly and fairly when:
1. Investigating claims;
2. Assessing the merits of claims; and
3. Attempting to resolve claims.
These three features are interconnected. Necessarily, any claims that are not adequately investigated will lead to unfair assessment of the claims merits and will not permit prompt resolution. This creates the overarching obligation on the insurer to ensure that the denial of any insurance benefit be based on a reasonable interpretation of the insurance policy following a fair investigation of the claim.
It is important to remember that there are two sides to a contractual relation. As a result, the organizing principle and duty of good faith in contractual relations extends to both parties: the insurer, as discussed above, and the insured. For instance, the insured has the obligation to disclose all information sought by the insurer in the application process.
Good Faith in the Disability Insurance Context
Therefore, an LTD or STD adjuster owes a duty to act (a) promptly and (b) fairly while investigating, assessing, and attempting to resolve claims made by the insured.
a) Promptness: Usually, the injured or disabled claimant will be in a position of medical and financial vulnerability as a result of the events that preceded the claim. Since the insured is under pressure to settle the claim as fast as possible for financial security, the duty of good faith obliges the insurer to act with reasonable promptness during each step of the claims process. According to 702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd's London, 130 OAC 373, this includes the “obligation to pay a claim in a timely manner when there is no reasonable basis to contest coverage or to withhold payment.”
b) Fairness: In 702535 Ontario Inc., 130 OAC 373 the Court of Appeal explained the fairness portion of the duty as applying to both "the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim."7
There are many tangible requirements that are created from the duty of good faith in this content. Common allegations of bad faith, include dismissing favourable medical reports, misleading the insured, terminating benefits without advising the insured, and not adequately reviewing the medical information submitted. For instance, when investigating claims the insurer must pay for all disbursements (i.e. cost of medical records) and independent medical examinations. When considering these records in the course of a claim, they must appreciate the opinions and diagnoses fairly and in context while determining initial and subsequent entitlement to benefits. They cannot refuse to pay under a policy without fairly considered medically substantiated evidence in favour of their position.
Consequences for Breach of the Duty
Breach of this duty can have a number of consequences for the insurer, including the potential for the court to award “punitive” and/or “aggravated” damages in order to punish the insurer and denounce their conduct. The leading authority with respect to punitive damages in disability claims is Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30, where an insured developed chronic fatigue syndrome and fibromyalgia. The claimant received LTD benefits for six years following these diagnoses. However, despite persuasive medical evidence to the contrary, the insurer discontinued her benefits based on surveillance allegedly proving her capability to work. One week before trial, the insurer settled the claim paying the full amount owing during the discontinued period plus interest. The plaintiff continued her claim against the insurer for bad faith performance.
The Supreme Court granted $20,000 in aggravated damages, but did not grant any punitive damages, finding that the insurer had not acted in bad faith. In order to attract punitive damages, the party’s conduct must depart markedly from ordinary standards of decency and must be malicious, oppressive or high- handed and offend the court’s sense of decency. This is an extremely high bar that requires an additional independently actionable wrong. According to the court, a breach by the insurer to act in good faith will meet this requirement.
Every insured person who has an LTD or STD policy is owed an implied duty to perform contractual obligations in good faith. Particularly, your insurance adjuster must act (a) promptly and (b) fairly while investigating, assessing, and attempting to resolve claims made by the insured.
The personal injury lawyers at Littlejohn Barristers have significant experience navigating the Municipal Act, 2001 and representing clients who have had been injured in slip-in-falls on public property. If you have suffered a personal injury or accident, please contact our Barrie office at 705-725-7355 to see if we can help.